Litigation risk, accounting quality, and investment efficiency

Hyeesoo H. Chung, Jinyoung P. Wynn and Han Yi

Advances in accounting, 2013, vol. 29, issue 2, 180-185

Abstract: This paper examines the moderating effect of litigation risk on the relationship between accounting quality and investment efficiency. We use directors’ and officers’ (D&O) liability insurance as a proxy for litigation risk, accruals quality for accounting quality, and investment cash flow sensitivity for investment efficiency (Biddle & Hilary, 2006; Hovakimian & Hovakimian, 2009). Using Canadian data from 1998 to 2008, we show that firms with higher D&O insurance coverage exhibit lower quality accruals. Moreover, the previously documented negative association between accruals quality and investment cash flow sensitivity is stronger (weaker) when abnormal D&O coverage is low (high), suggesting that the role of accounting quality in facilitating investment efficiency is conditional upon observable litigation risk.

Keywords: Directors' & officers' (D&O) liability insurance; Litigation risk; Accruals quality; Investment efficiency; Investment cash flow sensitivity (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:29:y:2013:i:2:p:180-185

DOI: 10.1016/j.adiac.2013.09.009

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